(Bloomberg) “There are two kinds of retailers,” Jeff Bezos famously said on a quarterly conference call in 2001, a few days after an influential coffee meeting with Costco founder Jim Sinegal at the local Barnes & Noble. “There are those folks who work to figure how to charge more, and companies that work to figure how to charge less, and we are going to be the second.” Amazon is No. 1 in the just-released Internet Retailer Top 1000.
For more than a decade, that Costco-inspired lowest-price-anywhere mentality fueled the rise of Amazon.com Inc.’s reputation. But recently the company appears to be taking a different tack. There are legitimate questions about whether customers are really seeing the cheapest products on the internet, or only the cheapest ones stored in Amazon’s warehouses. And now, for the second time in five years, Amazon has raised the price of its signature subscription service, Amazon Prime. It’s going up to $119 from $99 a year, the company announced on last week’s quarterly call with analysts, a rote ritual that Bezos hasn’t participated in for years.
A $20 bump isn’t a terribly steep increase for a service that offers free access to a massive catalog of TV shows, movies, music, photo storage and two-day shipping on millions of products. As RBC Capital’s Mark Mahaney quipped to his well-heeled readership in an investor note, it’s “up 5 Grande Lattes… a year.”
But it is an interesting departure for the Seattle company with the second-largest market capitalization in the world. Is Amazon raising the price of Prime because it has to—or because it can?
Four years ago, when Amazon raised Prime’s price to $99 from $79, it felt like the former. The price of gasoline was over $3.50 a gallon; the company was rapidly building new fulfillment centers; and net income was a meager $108 million that quarter with ominous projections of losses ahead. “Is a 20-year honeymoon coming to an end?” asked the New York Times as Amazon shares tanked that month. (Turns out: no.)
“It was almost like they needed to do it, to make it economical,” Mark Mahaney says about the earlier price increase. “It was almost defensive.”
Things today are quite different. Amazon’s earnings exceeded expectations, and the stock is up 71 percent in the last year. The company announced a relatively bounteous $1.6 billion profit on the quarter, partly because subscription services—Prime and some of the add-ons, like Amazon Music Unlimited—brought in $3.1 billion, up 60 percent from a year earlier.
So this time it feels like Amazon is raising the price of Prime not because it has to but because it can. In 2014, both Amazon and Netflix proved they had considerable pricing power and that customers would shrug at modest increases. Netflix Inc. seems to test that proposition every two years. It raised rates last October; yet people keep happily signing up.
Amazon likely sees many ways to spend $2 billion in incremental revenue. (That’s the additional $20 multiplied by 100 million Prime customers, assuming that Amazon rolls out the price increase globally.) They might be getting ready to move from a two-day shipping guarantee to one day—after all, as Bezos recently wrote, customers are “divinely discontent.” They could also be preparing to build another wave of fulfillment centers in expensive urban areas or girding for the additional costs of shipping groceries from Whole Foods stores to people’s homes. They are also likely going to need a few more billion to plug into Amazon Studios to create more mainstream TV shows and license live sporting events. On Friday, Amazon disclosed that it’s more than doubling its credit line to $7 billion.
With Netflix looking unstoppable and Walmart and other rivals investing heavily in e-commerce, all these moves are probably both necessary and inevitable in Seattle. So the answer to the question about Amazon’s price increase is probably both. Amazon is raising prices because it can and because in today’s hyper-charged competitive environment, it has to keep raising its game.